power play: what utc’s acquisition of rockwell …...strategy came in july 2017, when it set up...
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Why Now? The UTC acquisition of Rockwell Collins can be best
understood as a reaction to growing tensions between aircraft original
equipment manufacturers (OEMs) and their supply base. This tension
predominantly stems from significant profit margin differentials; by
assuming the bulk of program risk and development costs, aircraft OEMs
have been left with typically just half of the 15-20% margins commonly
enjoyed by their component providers. Consequentially, aircraft OEMs
have taken an aggressive two-pronged approach to rebalance industry
profitability: force significant prices concessions on the supply base, and
capture a more dominant share of the lucrative aftermarket.
OEM Pricing Pressure
Over the past half-decade, Boeing and Airbus have made the most visible
and concerted efforts to improve profitability by forcing cost reductions
on their supply chain. In 2015, Airbus started an A320-focused program
known as SCOPe+ to reduce supplier prices by at least 10%. This came on
the heels of the 2012 launch of Boeing’s similar Partnering for Success
(PFS) initiative. PFS offered a simple, yet grueling choice to suppliers:
shave costs by 15-25%, or risk losing their business with Boeing. One
year into the program, UTC’s Aerospace Systems (UTAS) segment stood
its ground and refused to lower its price on landing gear assemblies for
In one of the largest aerospace acquisitions on record, UTC agreed to acquire Rockwell Collins for $30B on September 4th, 2017. Assuming the deal is executed, it will create a component supplier with nearly unparalleled scale and portfolio breadth, and it will further aggravate growing tensions between aircraft manufacturers and their primary component providers. It also has the potential to stoke further industry consolidation and repositioning among mid- and lower-tier players. Corporate leaders will be increasingly challenged to maintain existing sales and margins, preserve customer and supplier relationships, and evaluate new pathways to growth in this quickly evolving environment.
WHITE PAPER | OCT 2017
DC | LONDON | PARIS | OTTAWA | TOKYO
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By Jay Carmel · Ari Buchman · Matt Miklavic
What UTC’s Acquisition of Rockwell Collins Means for the Commercial Aerospace Industry
Power Play:
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Boeing’s new 777X aircraft (due to
enter service at the beginning of the
next decade). UTAS’s gamble backfired,
however, as Boeing instead selected
a lower bid from Héroux-Devtek. This
major displacement materialized
despite the Canadian company’s
legacy focus on smaller landing gear
parts and limited experience further
downstream assembling landing
systems for large aircraft like the 777X.
With its Rockwell Collins acquisition,
UTC will seek to leverage its enhanced
clout to ward off similar debacles.
The new $60B behemoth will boast
a product portfolio that spans nearly
every major aircraft system, including
engines, electrical power, structures,
actuation, landing gear systems - and
now avionics and interior systems.
This breadth of coverage should
improve UTC’s bargaining power, and
ideally help reduce the likelihood
of price gouging or blacklisting on
upcoming programs, such as the
“New Midsize Aircraft” (NMA) that
Boeing is expected to launch by 2019.
A further hedge against OEM pressures
comes from the inherent cost
synergies afforded by this merger,
which will help UTC maintain profit
margins that shareholders have
become accustomed to. In this context,
it is understandable that executives
at UTC and Rockwell Collins have
pointed to estimated efficiencies
that can generate approximately
$500M in savings by 2021.
Assuming UTC can achieve or even
exceed this goal – as it did when it
purchased Goodrich for $18.4B in
2012 – it will be able to utilize these
freed-up resources in a variety of
UTC / Rockwell Collins Combined Platform Capabilities
Actuation & Flight Control
SensorsLanding Gear
Nacelles (Aerostructures)
Avionics & Data Solutions
Electrical & Environmental Solutions
Interiors
Engine Systems
Rockwell Collins Capabilities
UTC Core Capabilities
Segment Representative Company
Profit Margin
Platform Airbus 7%
Platform Boeing 10%
Aerostructures Spirit 14%
Interiors B/E* 20%
Engines P&W 20%
Avionics Rockwell 23%
Commercial Aerospace Profitability Benchmark by Segment
Note: 3 Year EBITDA Averages* Prior to 2017 acquisition by Rockwell Collins
POWER PLAY: UTC’S ROCKWELL COLLINS DEAL
Copyright © AVASCENT 20173
ways. In addition to aforementioned
margin preservation, there will also be
room for additional internal research
and development (IRAD) investments,
which will help UTC keep pace with key
aerospace technological advancements,
such as digital architectures, composite
structures, and more efficient engines.
Aftermarket Access
Requiring price concessions from
the supply base is not the only tactic
that aircraft OEMs are employing to
bolster their bottom line. Direct sales
of replacement parts to airlines and
their maintenance, repair, and overhaul
(MRO) entities in the aftermarket are
highly profitable for those suppliers
with access to design intellectual
property (IP). While aircraft OEMs
have historically deprioritized the
aftermarket, they are now seeking to
vastly increase their role in this margin-
rich domain, much to their suppliers’
dismay. Boeing’s recent formation of a
dedicated aftermarket business unit,
known as Boeing Global Services (BGS),
is a clear example of this new strategic
direction that poses a significant threat
to UTC and other Tier 1 players.
BGS seeks to achieve $50B in
commercial, military, and space
services revenue by 2026, a lofty
target considering Boeing generated
approximately $14B in services activity
in 2016. One way it can meet this
aggressive goal is through greater
insourcing of the design and production
of commercial aircraft systems that
generate substantial demand in the
aftermarket. Wings, nacelles, and flight
control actuation are some of the most
notable areas where both Boeing and
Airbus have recently brought work
in-house, not only to lower production
costs, but also to retain design IP and
gain greater leverage in the aftermarket.
Boeing’s latest manifestation of this
strategy came in July 2017, when it set
up Boeing Avionics, an in-house avionics
unit. This new entity will not only
threaten legacy avionics supplier roles
– including Rockwell Collins – but also
enable greater ownership of aircraft-
wide systems data. This will create
opportunities for Boeing to enhance its
health-monitoring and MRO capabilities
and capture larger aftermarket revenue
streams over the life of the aircraft.
Increased strategic insourcing, in
addition to revamped life-of-aircraft
maintenance programs (e.g., Boeing
GoldCare), will help Boeing and other
aircraft OEMs as they seek to capture
additional aftermarket revenue. While
an ever-expanding global aircraft fleet
will provide all competitors with greater
market opportunity, it appears inevitable
that BGS’ attempts to achieve $50B
in services revenue will likely come
Aircraft OEMs are taking an aggressive two-pronged approach to rebalance industry profits: force significant price concessions on the supply base, and capture a more dominant share of the lucrative aftermarket.
4
at the expense of UTC and Rockwell
Collins’ own aftermarket sales.
In this context, Tier 1 players must
look to add scale and capability in the
aftermarket to enhance their value
proposition and counter future threats.
For UTC, Rockwell Collins opens up new
opportunities in avionics and aircraft
interiors – segments where UTC lacked
a strong presence, yet together represent
roughly 20% of annual commercial
aerospace aftermarket materials
demand, according to Avascent
analysis. While competing in these
segments will be more challenging
than ever - especially as Boeing
Avionics matures - UTC and Rockwell
Collins are likely better off fighting
together instead of going at it alone.
What’s Next
The magnitude of UTC’s acquisition
ensures that the aftershocks will
reverberate across the aerospace
industry. For one, additional
consolidation seems inevitable as
scale becomes a critical enabler of
cost-competitiveness. And as supply
contracts become more onerous,
relationships across all echelons of the
supply chain will be tested, and many
smaller players will face increasingly
difficult strategic decisions.
UTC
After a half decade of acquisitions that
brought Goodrich, B/E Aerospace, and
Rockwell Collins product lines into the
UTC family, the company will clearly
devote its near-term efforts to integrating
its new assets to form Collins Aerospace
Systems. While UTC’s Otis and Climate,
Controls and Security (CCS) segments
look increasingly like outliers in this
new aerospace-dominant conglomerate,
ongoing R&D investment and healthy
margins in Otis and CCS suggest that
divestitures may not currently be in the
company’s overall financial interest.
Prospects for additional aerospace
acquisitions, meanwhile, are unlikely
to match the stature of UTC’s most
recent deal, as the market opportunity
for additional presence aboard
aerospace platforms is increasingly
limited (and affected by antitrust
concerns). Nevertheless, it would not
be surprising to see UTC invest in
Acquisition History of UTC and Its Major Assets
1995 2000 2005 2010 2015 Today
Hughes-Avicom
BFG divests chemicals, rebrands as Goodrich Corp.
Goodrich acquisition creates UTAS
UTC acquires Rockwell
Collins
Rockwell Collins, Inc. spun out of Rockwell International in 2001
28 acquisitions over B/E history
Note: Activity shown is representative, not exhaustive
Aeronautical
POWER PLAY: UTC’S ROCKWELL COLLINS DEAL
Copyright © AVASCENT 20175
smaller, accretive bolt-on solutions (e.g.,
adjacent electromechanical capabilities),
vertical integration (e.g., electrical wiring
and power systems), or in other aftermarket
areas like the growing Parts Manufacturer
Approval (PMA) domain, which is an
emerging threat in some of UTC’s core
segments (e.g., engines, electrical systems).
Aircraft OEMs
Although aircraft OEMs are continuously
exploring ways to increase their leverage—
such as dual- and sometimes triple-
sourcing key components—Boeing, Airbus,
Bombardier and Embraer can do little
in the near-term to thwart the rise of a
super-supplier. With new narrowbody
programs now entering service (e.g., Boeing
737MAX, Airbus A320neo, Bombardier
CSeries), widebody aircraft delivery rates
increasing (e.g., Boeing 787, Airbus A350),
and next-generation platforms due to
arrive by 2020 (e.g., Boeing 777X, Embraer
E-Jet E2), picking fights with critical
suppliers would be a highly risky endeavor.
Instead, battles between aircraft OEMs
and their suppliers will likely not fully
materialize until new aircraft programs
are launched at the turn of the decade.
In assessing these future opportunities,
aircraft OEMs have several responses to
industry consolidation: they can reduce
pressure on their component providers,
find alternate sources, or stay the
course, despite being inconvenienced by
increasingly conglomerated suppliers.
The first option is a non-starter: it
needlessly cedes hard-won concessions
and significant aftermarket opportunity.
Copyright © AVASCENT 201755
UTC’s acquisition of Rockwell Collins is a harbinger for the rest of the industry, illustrating the continued headwinds that suppliers face and the dramatic actions that are needed to remain profitable and relevant.
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Turning to UTC’s competitors would send
a strong message to others considering
acquisitions, but would reduce effective
competition and rob aircraft OEMs of
expertise and quality, ultimately creating
a narrow path to thread between risk
and cost. While Boeing’s willingness to
enlist Héroux-Devtek for 777X landing
gear illustrates a sizable degree of
risk tolerance, prior developmental
challenges on the 787 program will force
it and other OEMs to carefully evaluate
any additional supply base overhauls.
Due to the clear drawbacks of the first
two options, aircraft OEMs will likely
continue their current course of price
concessions and contract renegotiations
that enhance their aftermarket position.
The threat of additional insourcing
will also likely become a mechanism
to further pressure the supply base. In
addition, Boeing and Airbus may seek to
leverage their substantial lobbying power
to prevent further supplier consolidation,
arguing against the creation of quasi-
monopolies. As evidenced by Boeing’s
aggressive stance in its current trade
dispute with Bombardier, Boeing appears
willing to leverage its political clout, and
is likely emboldened by the substantial
domestic labor force that it employs in
today’s ‘Jobs First’ political environment.
In sum, through shrewd deployment
of business, political, and regulatory
tactics, OEMs will continue to “partner
for success,” their march toward
higher margins slowed but not
stopped by a new breed of suppliers.
Other Tier 1 Providers
Tier 1 suppliers, especially UTC’s
direct competitors, will likely find
their financial futures increasingly
impacted by UTC’s future reactions to
aircraft OEM price demands. Should
UTC acquiesce to some degree as the
acquisition’s cost synergies materialize,
near-peer suppliers will struggle to
profitably compete. Alternatively, if
UTC uses its newfound leverage to try
and preserve its margins, it may open
the door for competitors to market
themselves as a cheaper alternative.
Regardless, near-peer Tier 1 suppliers
are undoubtedly already evaluating
their own acquisition strategies, which
will further reshape the composition
of the supply chain. Large players
must keenly evaluate what is core to
their portfolio and identify how they
can maintain profitable access to both
original production and aftermarket
work. For instance, GE Aviation
is likely inclined to pursue future
additions to counter UTC, given their
direct competition in electrical power
systems as well as Boeing’s move into
avionics—a market area that GE itself
Suppliers face a critical crossroads: cave to price concessions while becoming a “trusted partner” to OEMs; acquire to remain cost-competitive in a consolidating landscape; or hoist a “For Sale” sign in a seller-friendly market.
POWER PLAY: UTC’S ROCKWELL COLLINS DEAL
Copyright © AVASCENT 20177
entered through its 2007 acquisition of
Smiths Aerospace. Honeywell, Esterline,
Moog, Parker Aerospace, Meggitt, and
others will face a similar crossroads:
remain on their current trajectory
by caving to price concessions, but
become a “trusted partner” to OEMs;
acquire in order to remain cost-
competitive with UTC as another “super
supplier”; or hoist a “For Sale” sign to
capitalize on what may increasingly
become a seller-friendly market.
M&A is a logical outcome for many,
yet it is not a sure-fire panacea: if
companies grow too large and diverse,
operations could become unwieldy
and impede any potential integration
benefits. Furthermore, suppliers
may face anti-trust headwinds with
aggressive acquisition (though the
strength of regulatory resistance
will depend on whether the US and
EU would seek to preserve effective
global competition, or instead defend
their respective aerospace regional
champions). Alternatively, should
suppliers remain too small, they
will likely lack the synergies, cost-
competitiveness, and leverage that
larger firms like UTC can now wield
in almost every market segment.
Tier 2/3 Component Suppliers
As OEMs and Tier 1s grapple for
leverage, perhaps the most profound
implications of continued consolidation
will trickle down to the lower echelons of
the supply chain. Increasing clout among
Tier 1 players in a zero-sum market
necessitates a corresponding reduction
in pricing power and aftermarket access
for lower-level providers. For these
smaller firms, the coming decade will
bring steadily intensifying pressure
from customers to cut costs and cede IP
rights – if they haven’t done so already.
Effectively countering such threats
will depend on a myriad of factors,
including the size of the supplier, its
core capabilities, and its portfolio
composition. In general, Tier 2 and
Tier 3 providers, should look to find
compelling merger opportunities or
make internal investments that allow
them to climb the value chain and
provide more integrated systems that
enable easier access to the aftermarket.
Copyright © AVASCENT 20177
Navigating the FutureThe Rockwell Collins acquisition will inevitably act as a catalyst for continued
repositioning and strategic adjustments across the aerospace supply chain.
Regardless of size, positioning, or offerings, suppliers must ensure that
long-term strategies are in place that address the following questions:
• How do we articulate a path to preserve pricing and platform positioning?
• How do we maintain relationships with key customers?
• What actions should be taken to ensure our own suppliers
are held accountable while minimizing disruptions?
• How realistic is it to expect growth or a sustained presence in the aftermarket?
• What adjacent growth avenues exist that can counteract
upcoming headwinds in our core portfolio?
• Should we be buyers or sellers in an active market, and
what actions should we take to position as such?
A supplier that fails to map a clear strategic vision to navigate the path ahead
runs the risk of finding itself adrift during a time of historic change.
8
About Avascent
Avascent is the leading strategy
and management consulting
firm serving clients operating
in government-driven markets.
Working with corporate leaders and
financial investors, Avascent delivers
sophisticated, fact-based solutions in
the areas of strategic growth, value
capture, and mergers and acquisition
support. With deep sector expertise,
analytically rigorous consulting
methodologies, and a uniquely flexible
service model, Avascent provides
clients with the insights and advice
they need to succeed in dynamic
customer environments.
About the Author
Jay Carmel is a Project Director at Avascent and leads the firm’s
aerospace practice. Mr. Carmel specializes in developing market
strategies, competitive pricing, and M&A advisory assessments
for firms and financial sponsors active in the commercial, civil,
and military aviation domains. Mr. Carmel has served a range
of manufacturers and service providers operating in segments
such as aerostructures, aviation connectivity, electromechanical
components, and unmanned systems. For more information,
contact: jcarmel@avascent.com.
Ari Buchman is a Senior Analyst at Avascent where he
provides strategy consulting support with a focus on
defense and commercial aviation maintenance, geospatial
imagery, military training, and unmanned aircraft systems.
Ari specializes in price-to-win capture efforts, inter-
national growth strategies, and M&A support. He holds a
Master’s Degree in Security and Diplomacy from Tel Aviv
University and is also a graduate of Emory University with a
Bachelor’s degree in History and International Relations. For
more information, contact: abuchman@avascent.com.
Matt Miklavic is a Senior Analyst at Avascent where he supports
a range of engagements, providing competitive intelligence, due
diligence, and strategy development support to clients in both
domestic and international markets. While serving a variety
of industries, Matt’s work focuses on defense systems and
platforms as well as commercial aerospace. He graduated from
the University of Notre Dame with a degree in finance and political
science. For more information, contact mmiklavic@avascent.com.
AVASCENT
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